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Best US NFPs of 2016 Means Little for US Dollar, Fed Policy Outlook

Best US NFPs of 2016 Means Little for US Dollar, Fed Policy Outlook

Christopher Vecchio, CFA, Omar Habib,

Talking Points:

- US Nonfarm Payrolls beats expectations significantly, posting best headline of 2016.

- Unemployment Rate rises as labor participation rates rises less than new job growth.

- USDOLLAR Index gains tempered as rates markets don’t move much.

Last month the question was if the weak May employment report was a ‘one-off’ event. After slowly weakening labor reports over the last few months, the new question will be if this strength is a one-off event; markets have barely pulled forward pricing for a Fed rate hike. The US employment report showed that the US economy added 287k jobs, beating expectations of 180k, despite a downward revision to last month’s already sluggish report to +11k. The unemployment rate rose more than expected, to 4.9% from 4.7%, beating expectations of 4.8%.

The rise to 4.9% unemployment was largely driven by a rise in the participation rate which rose slightly to 62.7% from 62.6%. This report was modestly positive throughout, with the underemployment rate falling, participation rate rising, jobs growth exceeding expectations, and wage gains continuing to push higher (albeit at a slower pace than anticipated).

As the best jobs report in all of 2016 and since October 2015, this report puts pressure on the Federal Reserve's efforts towards normalization and continues the conflicting nature of signals the Fed is observing in consideration for their rate path.

As financial markets continue to roil in uncertainty in the aftermath of Brexit, stronger economic data may point to a significantly different direction for the Fed. However, fed funds futures continue to diverge from Fed expectations, rising only slighlty from 40% to 48% in December 2016, well below the psychologically important level of 60% (chart 1 below).

Table 1: Fed Funds Futures Contract Implied Probabilities: July 8, 2016

Best US NFPs of 2016 Means Little for US Dollar, Fed Policy Outlook

Here are the data that’s lifting the US Dollar this morning:

- USD Unemployment Rate (JUN): 4.9% versus 4.7% expected, from 4.7%.

- USD Change in Nonfarm Payrolls (JUN): +287K versus +180K expected, from +11K (revised lower from +38K).

- USD Average Hourly Earnings (JUN): 2.6% versus 2.7% expected, from 2.5% (y/y).

See the DailyFX economic calendar for Friday, July 8, 2016

Chart 1: EUR/USD 1-minute Chart: July 8, 2016 Intraday

Best US NFPs of 2016 Means Little for US Dollar, Fed Policy Outlook

In an immediate response to the data, the US Dollar rose sharply against the Euro, with the EUR/USD falling to $1.1003 from $1.1083. By the time this report was written, the pair had recovered slightly to $1.1022. With FX volatility edging higher again, it’s the right time to review risk management principles to protect your capital.

Read more: Preview for June US NFPs and Outlook for USD-pairs, Fed Policy

--- Written by Christopher Vecchio, Currency Strategist and Omar Habib, DailyFX Research

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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